6 most common issues with splitting super in a divorce

According to the Australian Bureau of Statistics, 49,116 divorces were granted in 2019, which is a crude divorce rate of 1.9 divorces per 1,000 persons. This rate has decreased from 2.8 divorces per 1,000 persons in the last 20 years.

Whilst the overall divorce rate has decreased in Australia, there has been an increase in “grey” divorces. These are divorces amongst older couples, who have been in long-term marriages, generally over 20 years. When couples have been married for this long, there is a greater likelihood that there is a higher superannuation balance that will need to be split, compared to those who have been married a significantly shorter time when they divorce.

With superannuation entitlements being included as part of the estate that is split for Family Law purposes, as professional advisors, we need to be aware of the issues when dealing with divorce and superannuation. Here are some of the common issues:

1. Trustee and Membership of the SMSF

When the non-member spouse leaves the SMSF, they would need to resign as trustee if they were an individual trustee or resign as a director of the corporate trustee.

If the remaining member is going to now have a single member fund, they would either need to:

    • ensure the corporate trustee meets the requirements stipulated by the SIS Act (i.e. can be a single director company), or
    • if going to have individual trustees, then they would need to appoint a new trustee.

2. Tax Deductions for Contributions

ITAA 1997 provides a tax deduction for an employer who makes a contribution to a complying superannuation fund on behalf of an employee, however, this deduction is not available where the employer makes a payment to meet an obligation arising under an order or agreement under the Family Law Act. In this case, contributions will also not be assessable to the fund.

The same applies to spouse contributions when a spouse contribution is made for Family Law purposes, the tax offset will not be available.

3. Division of Superannuation Assets

The Courts can order that the fund’s assets are divided by trustee decision, after considering liabilities such as stamp duty and capital gains tax.  However, if the trustees cannot agree on how the assets are to be split, then the Court can order that the assets be sold, and the cash divided in accordance with the splitting order.  In this case, no CGT rollover relief would be available.

4. Documentation of Payment Split

When the payment split has been enacted, the trustee should ensure that all decisions have been documented. There are notices that the non-member is required to provide to the trustee after the split, as well as notices the trustee is required to give to both the member and non-member.

Whilst for a SMSF the member and trustees are the same persons, all necessary documentation in accordance with the legislation should be prepared and filed on the compendium. This will ensure that if there is an ATO audit of the fund, all processes in accordance with the splitting order will have been properly executed, and this can be shown to be the case.

5. Limited Recourse Borrowing Arrangements

The treatment of a limited recourse borrowing arrangement when there is a payment split due to marriage breakdown will depend on whether there are individual trustees or a corporate trustee.

If the SMSF has a corporate trustee, the trustee would need to ensure that the non-member, who is leaving the fund, is removed from any of the loan documentation. One of the requirements of a limited recourse borrowing arrangement is that the property is held on a separate trust. The bare trust may not require amendment because the trustee of the bare trust would be holding the legal title of the asset on behalf of the corporate trustee of the SMSF.

If the SMSF had individual trustees, it is more than likely that the entire loan documentation and possibly the bare trust would need to be re-prepared, to remove the non-member.

6. Splitting Pension Payments

Pension payments that are made under a family law payment split will count towards the minimum annual drawdown rules.

For the purposes of the Transfer Balance Cap (TBC), a debit arises in an individual’s pension transfer balance account for a retirement phase superannuation income stream that is subject to a family law payment split.

The member spouse is entitled to a debit in their TBC equal to the value of the superannuation interest that the non-member spouse is effectively entitled to. At the same time, the non-member spouse receives a credit in their transfer balance account equal to the full value of the member spouse’s superannuation interest that they are partially entitled to. To address the fact that the non-member spouse has an amount credited to their transfer balance account of more than the income stream that they are entitled to under the splitting agreement, a debit is also applied to their account to reflect the amount the member spouse is retaining.

Either the member spouse or non-member spouse can provide the transfer balance account report to the ATO. It is not a requirement that both report to the ATO. The debit will arise at the time the payment split becomes operative under the Family Law Act 1975 (Cth) or when the individual starts to have a transfer balance account, whichever is the later.

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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2022. Please do not reproduce without the expressed written consent of the author.